The FHA anti-flipping rules are growing in popularity by lending investors and being adopted for both VA lenders and many conventional mortgages as more lenders are looking to protect themselves from financing property "flips". Here in Sonoma County where opportunistic investors are putting recently purchased homes on the market it is important to understand how many of these properties will be un-financable in traditional financing terms.
The FHA rules are defined by HUD issued Mortgagee Letter 2006-1(http://www.nlihc.org/doc/MortgageeLetter2006-14.pdf). The anti-flipping rule established by HUD defines a flip as a property that is purchased by a speculator, and sold within 0-6 months, at a price at least 20% greater than the previous sale price, absent of improvements supported by appraisal note. According to the rule, the seller cannot hold title for less than 90 days. For reslaes between 91 and 180 days, where the new sales price exceeds the previous sales price by 100%, additional validation of the property's value will be required.
Here is Sonoma County, property flips are common. Investors, many of them real estate agents themselves, have swooped in to pick up distressed properties needing some improvements. These properties often are purchased at foreclosure process auction for as little as 30% of market value had the property been in fair shape. Upon fixing up the property, the investors want to get it back on the market as fast as possible, flipping their investment. For turn-around sales that take place less than 90 days from previous acquisition of title, FHA will not insure the mortgage. VA doesn't have a guideline anti-flipping rule but the lending investors who provide the funds for the purchase loan will not allow it now for VA. And most conventional lending investors are disallowing less than 90 day flips to protect themselves from inflated valuations on the subject property and to discourage speculation.
Exceptions to the Rule
There are exemptions to the 90 day anti-flipping rule. The exemption most commonly cited in Sonoma County is "Sales of properties by state and federally chartered financial institutions and Government Sponsored Enterprises." This applies to banks that have ownership of the property which applies to REOs owned by the banks. Other exemptions include HUD owned homes, Government agency owned homes, non-profits with deed restricted housing, inheritance sales, employer purchased housing for relocation, and homes in federal disaster areas.
Red Flags
There are Red Flags alerting underwriters to violations of anti-flipping policies when they review home purchase loan files. The following items will red flag a lender of a potential property flip.
· Property seller is not owner on record.
· Seller has recently acquired title and the mortgage lien date is new.
· Cash was paid for the home in a recent transaction (no liens on property).
· The preliminary title report submitted to new lender has no title company name or logo.
· Any reference in contract to "double escrow".
· For Sale by Owner.
· Affiliated parties to transaction.
• Appraisal date precedes contract date.
For more Sonoma County real estate financing info and up-to-the-minute rates, go to www.sonomacountyhomeloans.com.
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